Stern Advice: Debit cards don't deserve their popularity

WASHINGTON Wed Dec 15, 2010 2:16pm EST

A shopper pays with his credit card in a supermarket in Nice southern France, February 25, 2008. REUTERS/Eric Gaillard

A shopper pays with his credit card in a supermarket in Nice southern France, February 25, 2008.

Credit: Reuters/Eric Gaillard

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WASHINGTON (Reuters) - Shoppers are leaving their credit cards and checkbooks (ha! remember them?) at home and using debit cards instead. But that may not be the best idea; those debit cards might be offering them fewer rewards and carrying more risks than they realize.

Debit card use continues to grow; they have outstripped credit cards and checks for years. In 2009, one in three non-cash transactions was done with a debit card, the Federal Reserve reported. In the last year, another 8 million consumers have given up their credit cards, so the 2010 numbers should show even bigger growth in debit card use.

But you won't find them in the wallets of top consumer advocates. "We are very clear on that matter. We do not recommend that people use debit cards," Beth Givens, director of the Privacy Rights Clearinghouse, said. "We think they can be dangerous." Experts at the Consumer Federation of America have made similar pronouncements.

Furthermore, the Federal Reserve is expected to issue rules which could make debit cards less profitable to the banks that issue them. And that could ultimately reduce the benefits consumers get from using them.

Here's why you may want to keep that debit card at home next time you head to the mall.

* It's your checking account. It is true that banks and credit card users have offered debit card holders "zero liability" promises when their cards (or their card numbers) get stolen. But there are limits to those promises. They don't have the same legal authority as credit card protections, and may not always kick in, says Joanna Crane of the Federal Trade Commission.

Most banks do back their debit cards in the event of fraud. The bigger issue is the time it takes to resolve. Fraud investigations can take weeks or months, and during that time you aren't likely to have access to your funds.

The average debit card fraud amounted to $3,677 in 2009, and went undetected for an average of 35 days, according to data from Javelin Strategy and Research. Once detected, it took issuers an average of 24 hours to resolve; that was longer than the 20 hours it took to fix a credit card problem. Some take longer. Unless you have a big cushion in your checking account, fraud conducted with your debit card number can throw the rest of your payments into disarray.

* Disputes can get tricky. If you have a dispute with a merchant, you can take it to your credit card company and await resolution, and not pay for the item or service until the dispute is resolved. You can do the same thing with most debit cards, but you've already paid the money out of your checking account. "With a debit card, that's my money. The burden is on me to get it back from the bank," says Jim Brown, professor emeritus of the University of Wisconsin in Milwaukee, who has studied payment systems. "It's a burden of proof thing and that's a big deal."

* Rewards may disappear. Most cash-back cards will give you at least 1 percent back on your purchases. That used to be true of debit cards, but it is becoming less and less true. The Federal Reserve Board is expected to issue rules on Thursday, December 16, that would limit the amount of money debit card issuers could collect from merchants that take their debit cards. That's expected to cost banks millions of dollars when it kicks in next summer. "Banks have previously offered rewards programs with debit cards. You'll see them either go away in their entirety or be scaled back in terms of richness," said Samir Kothari of Billshrink, a savings and card comparison website.

* You have other options. If you qualify for a credit card and have the discipline to pay the bill in full every month, you are usually better off just using your credit card and not using your debit card. If you can't qualify for a credit card, you can get a secured credit card instead of a debit card. That may cost you some fees, but it will help you build a better credit profile while keeping your bank account balance protected.

Don't jump at the banks' latest answer for shoppers: prepaid plastic, which is gaining users. Stored value (or prepaid) cards may not carry the risks of a card linked to your checking account, but they effectively require you to spend the money even before you go shopping. Does that sound like a good deal to you?

(The Personal Finance column appears weekly. Linda Stern can be reached at linda.stern(at)thomsonreuters.com and tweets at www.twitter.com/lindastern)

(Editing by Gunna Dickson)

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